Avoidance Techniques: Could a U.S. crackdown on tax havens turn Vancouver into a global financial centre?
My latest, for BC Business Magazine, October, 2009.
Mentioning international taxation in the same breath as, say, the Cayman Islands or Bermuda is a quick way to turn images of a tropical holiday into a nightmare of paperwork and complicated accounting. While international taxation isn’t particularly sexy, it is coming under more scrutiny in the U.S., and that’s causing longtime advocates to see renewed hope for establishing Vancouver as an international finance centre.
Tax reform became a hot topic in the U.S. during last year’s presidential campaign, when Barack Obama referred to “the outrage” of seeing a building in the Cayman Islands that more than 12,000 businesses claimed as their headquarters. He went on to observe that the building, called Ugland House, was either “the largest building in the world or the largest tax scam in the world.” Addressing this “outrage” by reforming tax policy to close loopholes exploited by corporations doing business abroad became one of Obama’s campaign vows, and the U.S. Treasury Department has since published recommendations suggesting sweeping reforms.
The crux of the American government’s move to curb tax avoidance is a desire to “level the playing field” by introducing new forms of taxation on companies that avoid U.S. taxes by setting up subsidiaries in jurisdictions whose only conceivable asset would seem to be lax taxation laws.
But attempts to fill U.S. coffers by raising the tax rates on multinational corporations’ offshore profits may just backfire. In a global economy, there is little to stop a U.S. company from simply relocating its head offices to another country – like, say, Canada. Rather than pay U.S. taxes for transactions with subsidiaries headquartered in offshore tax havens, a company could simply claim an address in Canada as its head office and move its administrative functions here. And Vancouver would be particularly attractive, thanks to B.C.’s International Financial Activity Act, which offers a break on provincial corporate income taxes to companies engaged in international financial activity that establish a head office in B.C.
“I think what [President Obama is] doing down there will indirectly affect Canada positively in that we’ll get potentially more new head offices,” says Brad Sakich, PricewaterhouseCoopers’s tax leader for the B.C. region. Sakich points out that as the U.S. moves to raise taxes, Canada is doing just the opposite: “The split between Canada and U.S. rates are as big as they’ve been for 25 years. Canada’s got a much broader-based, simpler system for taxing offshore income in that if we earn it in an offshore jurisdiction like Barbados, even if it’s a low rate, [when] we bring it back, it’s totally exempt.”
A recent initiative from Ottawa to close loopholes allowing corporations to avoid taxation in Canada by using offshore subsidiaries failed. The Anti-Tax-Haven Initiative, part of the 2007 federal budget, aimed to “prevent multinational corporations from using tax havens and other tax avoidance structures to generate two expense deductions for only one investment,” a practice that Finance Canada dubbed “double dipping.” But on March
4, 2009, when the latest Budget Implementation Act passed its third reading in Parliament, the section of the Income Tax Act introduced to prevent double dipping was repealed. This came on the heels of what was widely described as an “outcry” from corporate Canada.
If Canada can be seen as moving in the opposite direction relative to the U.S. on international tax policy law, B.C. is in a whole different universe. B.C.’s International Financial Activity Act, introduced in the late 1980s and modified in the early 2000s, includes a series of tax breaks for multinational companies with head offices in Vancouver. The act was designed specifically to complement the International Financial Centre of B.C. (IFCBC), which was established in 1986 in an attempt to lure international businesses to the province. It is aimed at the financial sector and businesses with overseas operations, and companies from any country qualify so long as they can claim a head office in B.C. The new rules set out in the program essentially changed B.C. into a tax haven by allowing financial transactions between related parties to qualify for exemptions on provincial tax, thus allowing Vancouver-based multinationals to repatriate tax-free income from their offshore subsidiaries.
A good example of those incentives at work is in the mining sector. B.C.’s mining companies are big players in the provincial economy, but few of them have producing mines here. Instead, most are “head offices with investments abroad,” according to Sakich, who is also a board member of the IFCBC.
IFCBC proponents are hoping that the U.S. administration’s renewed interest in taxing U.S. transactions in such well-known offshore tax havens as Bermuda and the Cayman Islands may drive more head offices to Vancouver, which ranked 25th out of 68 world financial centres in the fifth edition of the U.K.’s Global Financial Centres Index. This might help reverse trends that have seen fewer and fewer head office jobs in Vancouver. According to Statistics Canada, in 2005 12,000 people in Vancouver were employed in head offices, compared to almost 17,000 in 1999.
It remains to be seen how much of Obama’s international taxation reform will ultimately be implemented. The U.S. Treasury’s recommendations on cracking down on tax avoidance through offshore subsidiaries will likely not be adopted into official U.S. policy for years to come. In the meantime, the Obama administration will likely have to settle for taking closer aim at “illegal or nearly illegal activities offshore,” according to Clint Stretch, the managing tax principle at Deloitte and Touche’s office in Washington, D.C.
Obama’s reference to “the largest tax scam in the world,” might touch a nerve with those whose memory extends back to 1989 when Forbes magazine called Vancouver “the scam capital of the world.” Twenty years on, as B.C.’s policy on tax havens diverges further and further from that of Washington, we may yet regain that claim to fame among our neighbours to the south.